Investor targeting McDonald's makeup

Financier Ackman wants property sold

November 15, 2005|By John Schmeltzer, Tribune staff reporter.

New York financier William Ackman, who gained a reputation for winning big stock payouts from large lenders he contended were undervalued, on Tuesday plans to take on the restaurant industry's biggest player, McDonald's Corp.

The 39-year-old Harvard MBA and general partner of Pershing Square Capital LP is scheduled to unveil his proposal to increase the value of McDonald's shares. It is expected to include a call for the Oak Brook-based burger giant to sell off company-owned restaurants and borrow billions of dollars to be distributed to shareholders in some form

Ackman is to detail his plans at an investment conference in New York, to be followed by a press conference.

McDonald's has remained silent, waiting to hear Ackman's plan. But this month McDonald's Chief Executive James Skinner said the company had no plans to restructure itself.

"We have no intention to undertake a large-scale restructuring either through ... spinoff or a real estate investment trust," said Skinner. "Neither would be in the best interests of our system or our shareholders."

Major investors have doubts about whether McDonald's will cave to pressure from Ackman.

"I don't think McDonald's will bite," said Janna Sampson, director of portfolio management for Oakbrook Investments in Lisle, which owns more than 1 million shares of McDonald's stock. Sampson said Oakbrook Investments has achieved a 46 percent return per year on the $13 million it invested in McDonald's in early 2003.

But Ackman is coming off a big win. This summer Wendy's International Inc. agreed to a $1.2 billion restructuring and spun off a Canadian coffee chain following pressure by Ackman. He also compelled the Dublin, Ohio-based No. 3 hamburger chain to sell one-third of its company-owned restaurants to franchisees.

Ackman, who has accumulated stock and options equal to 4.9 percent of McDonald's shares, has been rebuffed in attempts to compel McDonald's to sell the real estate beneath many of its restaurants. And he has floated a plan that calls for McDonald's to spin off one-third ownership in the 8,000 company-owned restaurants, known as McOpCo, and borrow $15 billion that could be returned to shareholders in a stock buyback.

About 73 percent of the company's 31,000 restaurants are privately owned franchises; in the U.S., it's 85 percent, according to McDonald's. The company owns 37 percent of the land beneath its restaurants.

Many investors are expecting Ackman to present a variation of the plan calling for the company to spin off one-third of the company-owned stores and borrow billions of dollars to be paid to shareholders as a dividend.

And Ackman isn't the only one who apparently believes there is more value buried within the company's operations.

A day after Skinner brushed off Ackman's ideas, Vornado Realty Trust, one of the country's most aggressive REITs, revealed on Nov. 1 that it had acquired a 1.2 percent stake in McDonald's by purchasing 858,000 shares and options for an additional 14.5 million.

Some speculate Ackman and Vornado hope to raise the stock's price above the cost of their options, believed to be at $37 a share and expiring next summer.

When Vornado, run by Steve Roth and Michael Fascitelli, announced last year that it had acquired a large stake in Sears, Roebuck and Co., the retailer's shares logged a one-day gain of more than 23 percent.

But the recent moves have had little effect on McDonald's stock. Shares gained 13 cents Monday, to $33.93, on the New York Stock Exchange. Since Ackman revealed his investment on Sept. 23, McDonald's stock has risen less than 2.5 percent, or 82 cents per share.

Carl Sibilski, an analyst with Chicago-based Morningstar Inc., said the proposals make no sense for the burger giant.

"It really doesn't make much sense to give up control of any of your sites," he said, questioning why McDonald's would want to increase its debt by $15 billion. Currently, the company carries about $15 billion in debt on its books.

But former McDonald's franchisee Richard Adams, who offers consulting services to franchisees, believes company executives are missing the point.

"Creating a separate McOpCo entity would be great for the McDonald's system, and most of the obstacles being thrown around are imaginary or are no longer realities," he said.

"It seems that many [McDonald's] watchers think McOpCo operates in a vacuum, insulated from the franchisee stores," said Adams. "If McOpCo is made accountable, it would improve the entire McDonald's system."